IR35 legislation affects thousands of UK contractors and the businesses that hire them. Non-compliance can result in significant tax bills and penalties.
What is IR35?
IR35 determines whether contractors are genuinely self-employed or “disguised employees” for tax purposes. If caught by IR35, contractors pay income tax and National Insurance as if employed, while losing business expense deductions.
Key Tests for IR35 Status:
Control Who decides what work is done, how it’s done, when and where? High client control suggests employment. Genuine contractors have autonomy over methods and timing.
Substitution Can you send someone else to do the work? Employment typically requires the specific person. Contractors should have genuine substitution rights, even if not exercised.
Mutuality of Obligation Is there ongoing obligation to provide and accept work? Employment involves continuous obligation. Contractors work on specific projects without ongoing commitments.
Financial Risk Do you risk making losses? Employees receive guaranteed pay regardless of results. Contractors should bear financial risk through fixed-price contracts or potential losses.
Off-Payroll Working Rules (OPW):
For medium and large private sector clients (introduced April 2021), the client determines IR35 status and handles tax if inside IR35. Small companies remain under old rules where contractors self-assess.
Compliance Strategies:
Maintain genuine business practices: multiple clients, business premises, professional indemnity insurance, and business bank accounts. Document contractual terms clearly. Use Status Determination Statements (SDS) for OPW engagements.
Keep detailed records of working arrangements, client relationships, and business expenses. Consider professional IR35 reviews for high-value or long-term contracts.
Penalties:
HMRC can investigate up to 6 years retrospectively. Tax, National Insurance, and penalties can exceed 100% of contract value. Interest charges apply from original due dates.
Professional advice is essential for contractors with significant IR35 exposure or complex working arrangements.
